Pricing models

Pricing models

In this article, Barry Horwitz offers valuable insight into pricing. 

Pricing. It’s one of the most important elements of any business value proposition. And yet, it’s a topic that many struggle with. That’s because setting the right price is about much more than simply setting price higher than costs or mimicking the actions of competitors.

Some things to consider…

Pricing sends signals.

While economists have long developed theories based on the assumption that we all act as rational beings (i.e., as customers, we do the math and figure out the optimal action), an entire field of behavioral economics has suggested otherwise.

For example, my tennis club has a simple, annual membership fee, avoiding the complexity of charging for court time by the hour. Like most exercise facilities, the frequent users are therefore subsidized by those who come less often. And, thanks to the “use it as much as you like” experience, the club feels more like home in comparison to those clubs that charge by the transaction.

Effort does not necessarily equal value.

In my own consulting work, I price based on the project, avoiding hourly charges or the old “time and materials” approach. After all, my clients are hiring me for an outcome — often a strategic plan — not simply time spent working on their project.

Project pricing removes “bad” incentives for me (e.g., working slowly, doing more research than necessary), while rewarding me for my existing knowledge. Most important, it provides simplicity and predictability for my clients while aligning price with value delivered.

Lower prices can reduce demand.

Some companies assume that when business is slower than anticipated, the best thing to do is lower prices… but that might not always be the case. One company in this position surveyed its customers, only to find that price was the third most important consideration, behind quality and the ability to make customized requests. Concluding that lowering price might suggest that those two factors would be reduced in the future, they raised their prices — and their business improved.

Likewise, a concern about charging too much can cause organizations to leave money on the table. As the pandemic was getting underway, a nonprofit client of mine had to quickly convert a convention to completely virtual. Their instinct was to lower the price, thinking that the value offered would not be perceived as being as high as their in-person offering. But when you consider that the real cost of attending an out-of-state conference can be many times higher than the virtual ticket alone, a discount may not have been necessary.

 

Key points include:

  • Influencing customer behavior
  • The potential for creativity
  • How lower prices can reduce demand

 

Read the full article, The Price is (Sometimes) Right, on HorwitzandCo.com.

Ian Tidswell provides insight into the psychology of pricing.

Why are we often less than completely rational? Delving into psychology, one can think of the brain as having two types of circuits: system 1 and system 2 (Kahneman) or elephant and rider (Haidt).

The elephant (system 1) acts quickly and seemingly automatically, following a set of pre-programmed rules. It’s in control when you react to seeing a family member, catch a ball thrown at you, answer simple questions like 2+2 and make associations like “bread and b….”.  Practice and experience “trains” the elephant and results in situations like driving home from work and not quite knowing how you did it.

The rider (system 2) is our “executive thinking”. It’s logical, deliberate and slow, taking concentration and effort. It’s in control when you are engrossed in a movie, look for someone in a crowd, solve a problem, or do almost anything for the first time. When the rider is active you may lose track of what’s going on around you, letting the elephant get on with mundane activities.  However, the rider is lazy: if it thinks the elephant has things under control, it will go with the flow.

 

Key points include:

  • What pricing elephants are
  • How to get better pricing outcomes
  • Building a strong foundation for pricing decisions

 

Read the full article, Getting the Elephant to Smile, on EenConsulting.com. 

Robbie Kellman Baxter takes a look forward at the future of subscription-based business and the application of a popular pricing tactic.

Subscriptions are everywhere. Big companies, small companies, public, private, venture-backed, bootstrapped, and across virtually every industry.

And many are starting to complain of “subscription fatigue”.

They might feel that the subscription pricing isn’t justified by the offer (a Product/Market Fit problem).

Or maybe they feel bad about fact that they aren’t taking advantage of all the great value their subscriptions provide–too many unread New Yorkers, uneaten Blue Apron kits (Subscription Guilt).

Or maybe they’re just angry that it’s so darn hard to find the cancel button.

I am a big fan of subscription pricing. I have dedicated more than twenty years to helping organizations use subscription pricing as a tactic in building deeper, more trusted relationships with their customers. But they’re not for everyone and they aren’t right for every situation.

Increasingly, people are wondering if subscription pricing is here to stay, or just a fad.I was motivated to write this article by these questions and in particular by product strategy guru Gib Biddle, who asked me to weigh in for his Ask Gib PM newsletter on Substack.

Subscriptions are not new–people paying recurring fees in exchange for access to content, commerce and/or community benefits for hundreds of years. What is new is that technology is extending the infrastructure that enables the kind of trusted relationships needed to justify subscription pricing.

With the rise of things like cloud computing, subscription billing, usage analytics and community platforms, it’s never been easier, operationally, to implement subscriptions as part of a business strategy.

Subscriptions support a more customer-centric approach. To be successful with a subscription, an organization needs to focus on delivering ongoing value, that supports a subscriber’s ongoing goals or problem solving-needs. Therefore, in many cases, the subscription offering provides more value. I don’t need to own a car–I need to get to work every day. I don’t need a CD collection–I need access to the music I love.

 

Key points include:

  • The ongoing impact of using subscriptions
  • Going beyond the traditional ways of paying for value
  • The value of using impact data

 

Read the full article, Will Subscriptions Work Forever? The Future of a Popular Pricing Tactic, on LinkedIn.

 

In this episode of Subscription Stories, Robbie Kellman Baxter interviews Electronic Arts’ Mike Blank about bringing subscription to the world of gaming. They discuss the challenges of subscriptions in the gaming industry, how to encourage consumers to discover new content within the subscription, and how EA offers multiple consumer models to support their “player first” promise.

‘EA has historically built their model around these awesome specific franchises, each with their own fan base: Madden, Battlefield, The Sims. So why did you decide to implement subscriptions across all the franchises? Do you remember how that happened?’

‘I frankly, I think this is what inspired us to think about this idea of a gaming subscription because we were seeing what was happening in the world of movies and music and books and where Netflix was. And it was clear that if you could offer something of value in the entertainment space to a consumer with low friction, with tremendous convenience, at a price that was reasonable, that that package would be something that someone would want to pay for. In our case, in the world of console gaming games are roughly 60 dollars as an upfront cost. And that cost has been relatively similar for many, many years. And so our business has been built around blockbuster releases of amazing entertainment, immersive entertainment experiences that someone would pay for and then enjoy for some period of time. Not dissimilar, perhaps, to a blockbuster movie that you might go to a movie theater for. Although the price point is a lot higher for games, it cost hundreds of millions of dollars to build a triple-A game. The world of gaming has evolved, but that price point that sixty dollars price point has remained relatively stagnant. And so when I reflect back about like, well, why did we get into this business? It was because what we were seeing, the behavior that we were seeing in the rest of the entertainment world. And the question we asked ourselves was, why is this not happening in games? What is different about gaming that is preventing us or any other publisher or any other major developer of gaming consoles to experiment in the world of subscriptions? Gaming is more complicated, though.’

 

Key points from this interview include:

  • The metrics EA used to measure success
  • How EA shares subscription data across the company without distracting from other “player first” projects
  • How to tackle pricing in the gaming world and how EA chose its pricing model

 

Catch the full episode, Mike Blanc on keeping a ‘players first’ mindset within a subscription business, on RobbieKellmanBaxter.com.

For more information on building a subscription business, Robbie will be speaking at a zoom conference, How to Build Super Compelling Subscription Products, on Tuesday, October 27, at 1:30 PM ET. 

 

 

This article on Sean McCoy’s company blog explains why long-term forces and trends are forcing many heavy industries to reshape value chains, change economics, and disrupt business models.

Digital technologies are making it possible for firms to expand their offering and meet new customer needs and serve new customers. For a manufacturer or heavy industrial company, this means companies that were not your competitor yesterday are your competitor today and tomorrow. The executives at GM and Ford lose many hours of sleep wondering if and how Google and Apple will eat their lunch.

Competitive intensity is also increased by changes in the cost of resources and location economics. Those changes are drying up some profit pools, increasing competition at the remaining ones. Low-cost manufacturers in China used to win on price, and domestic manufacturers on speed. For years, low-cost manufacturers have been re-shoring production as rising labor costs in China neutralized the cost advantage. Now, low-cost manufacturers can win on price and speed. The producers that stayed domestic are finding themselves stuck between a rock and a hard place.

Even if your market is stable, disruptions in other markets can dry up other profit pools, driving competitors into your space. When oil prices tumbled and oil companies needed less metal, metal companies and mines serving the oil and gas industry looked to other sectors that need metal, e.g., construction, utilities, ship builders. As a result, the mines and plants serving those industries had to deal with price pressures and declining volumes, hurting ROA.

 

Read the full article, Responding to competitive pressures in heavy industry & manufacturing, on the McCoy Consulting Group website.